BP 2014 Annual Report Download - page 96

With the exception of the risk related to the recent significant decrease in the oil price the other risks are consistent with the prior year. The risk we
identified in the prior year related to the determination of the fair value of the assets and liabilities of the Rosneft business on acquisition of the equity
interest is not relevant to the current period as the acquisition was completed and accounted for in the prior year.
Our application of materiality
We quantify materiality in planning and executing the audit and in evaluating the materiality of misstatements on the financial statements and the
effect they have on our audit. In determining if the financial statements are free from material error, we define materiality as the magnitude of an
omission or misstatement that, individually or in the aggregate, in light of the surrounding circumstances, could reasonably be expected to influence
the economic decisions of the users of the financial statements. The evaluation of materiality requires professional judgement and the consideration of
both qualitative and quantitative factors.
We determined materiality for the group to be $1 billion (2013 $1 billion), which represents 5% of underlying replacement cost profit (as defined on
page 255) before tax having added back charges related to the Gulf of Mexico oil spill response. We used this measure to calculate our materiality to
exclude the impact of both changes in crude oil and product prices and items disclosed as non-operating items that can significantly distort the results.
This provides a basis for assessing the importance of misstatements and in determining the scope of our audit procedures.
We determined, based on our risk assessment and consideration of the group’s control environment, that performance materiality be set at 75% of our
materiality for the group, namely at $750 million (2013 $750 million). Performance materiality is the application of materiality at an individual account or
balance level and is set to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements
exceeds materiality. Audit work on individual locations is undertaken using a percentage of our total performance materiality. We allocate performance
materiality to the components of the group we audit based on their relative risk and size. The range of performance materiality allocated to components
in 2014 was $150 million to $640 million (2013 $150 million to $640 million).
We agreed with the Audit Committee to report all audit differences in excess of $50 million (2013 $50 million).
We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in the light of other relevant
qualitative considerations.
An overview of the scope of our audit
Our audit scope is risk based and is designed to focus our efforts on the areas at greatest risk of material misstatement, aspects subject to significant
management judgement and on the locations of greatest complexity, risk and size. We design and execute our audit based primarily on our
assessment of the risks particular to this company and the industry in which it operates.
In scoping the audit we view the group as 42 Regional Performance Units (‘RPUs’) plus the group functions. The group audit scope focused on 19
RPUs in the US, Azerbaijan, Angola, UK, Germany, Russia, Singapore and the group functions. We designed specific procedures for these locations
and functions to provide an appropriate basis for executing audit work to address the risk of material misstatement. This included the audit of all
accounts that were impacted by our assessment of the risks of material misstatement (identified above). We note that for these RPUs we do not
include all balances at these entities in our specific audit scope, based on our assessment of risk we exclude certain low risk, lower value balances.
The specific in scope locations represent audit coverage of 71% (2013 68%) of revenue and 63% (2013 72%) of property, plant and equipment. Our
procedures at the locations in group scope included assessment and testing of management’s financial controls and other substantive and analytical
verification procedures. For those locations and balances that are not subject to specific group scoping (there are many small, low risk locations and
balances in the 23 RPUs not included in our specific scope) we assess and test management’s group wide controls and undertake analytical and
enquiry procedures to address the residual risk of material misstatement.
One of the key locations is Russia which includes Rosneft, a material associate not controlled by BP. We were provided with appropriate access to
Rosneft’s auditors in order to ensure they had completed the procedures required by ISA 600 on the financial statements of Rosneft used as the basis
for BP’s equity accounting.
The Group audit team continued to undertake a programme of planned visits to significant locations to ensure the audit is executed and delivered in
accordance with the planned approach and to confirm the quality of the audit work undertaken.
Our response to the risks of material misstatement identified above included the following procedures:
The determination of the liabilities, contingent liabilities and disclosures arising from the significant uncertainties related to the Gulf of
Mexico oil spill
We continued to assess developments in legal cases related to claims and penalties through reading the determinations and judgments made by the
courts, discussions with the BP legal team and correspondence with external lawyers. The determination of liabilities related to the oil spill takes
months and years to evolve and during 2014 there were some significant developments in loss claims and potential penalties, specifically related to the
Economic and Property Damages Settlement Agreement and Clean Water Act penalties (see Note 2), that we considered in assessing the
requirements of IFRS in relation to liabilities, contingent liabilities and disclosure. Where appropriate we deployed valuation and modelling experts to
inform our assessment. There is significant uncertainty related to the ultimate liabilities and we considered the disclosures related to these
uncertainties and concluded that it was appropriate to include an emphasis of matter related to these uncertainties in this report.
The significant decline in oil and gas prices since late 2014 has the potential for a material impact on the carrying value of the group’s
assets.
Movements in commodity prices can have a significant effect on the carrying value of the group’s assets. A significant and rapid drop in prices will also
quickly impact the group’s operations and cash flows. We assessed the principal risk arising in relation to the financial statements to be associated
with the carrying value of tangible and intangible assets, many of which are supported by an assessment of future cash flows. The assessment of the
asset carrying values is further complicated as external market evidence, such as market transactions, become less reliable in a period of significant
change to the price of oil. We extended the scope of our procedures to address the change in risk profile of the group’s assets and to scrutinize
impairment considerations. We extended the use of our own valuation experts and external data in critically assessing and corroborating the revised
assumptions used in impairment testing, the most significant being future market oil prices, reserves and resources volumes and discount rates. We
also performed audit procedures on the mathematical integrity of the impairment models and sensitivity analysis and procedures to ensure the
completeness of the impairment charge and exploration write offs.
This page does not form part of BP’s Annual Report on Form 20-F as filed with the SEC.
92 BP Annual Report and Form 20-F 2014